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Federal Income Tax Deduction

By Nicky Pilkington

The American laws are great fun to play with if you know how to handle them, but better be sure you know the rules, or else you fall into trouble.

The federal income tax deduction is a statutory requirement under the American laws. All American citizens who fall under this category have to pay this. Taxable income is calculated by removing (a) excluded income, (b) exemptions, and (c) permissible deductions from the individual’s gross income.

The following are the heads under which you can avail the tax deduction:

1. Exemptions: Some common exclusion from gross incomes is:I) Earnings made from life insurance contractsii) Earnings made from gifts and inheritances iii) Proceeds granted for personal injuriesiv) Interest received from state and municipal bonds

certain conditions have to be kept in mind before availing these deductions. 2. Deductions: In addition to the standard deduction, some common “above-the-line” deductions include:i) Trade/ Business expensesii) Alimonyiii) IRA contributionsiv) Net capital lossesv) Expenses incurred due to property used for income generation

income tax laws are not everybody's cup of tea and so should be handled with care.

3. The Standard Deduction: When individuals have minimal “below-the-line” deductions, they are directly granted a standard deduction. The standard deduction under different heads in 2004 was as follows: i) Single $4,850ii) Head of household $7,150 iii) Married filing a joint return $9,700 iv) Qualifying widow(er) with dependent child $9,500 v) Married filing a separate return $4,850

4. Miscellaneous Itemized Deductions: These usually include:i) Interest paidii) Taxes paidiii) Losses incurrediv) Charitable contributionsv) Medical costs borne

Such miscellaneous deductions are permissible if and only if they surpass 2% of adjusted gross income.

5. Alternative Minimum Tax: applicable when minimum tax revenue is less than the predetermined amount. the individual would now be paying a very negligible tax and helps him in saving some money.

6. Itemized Deductions: The alternative to the standard deduction is itemized deductions. For the year 2004, the major items included in itemized deductions were:

i) State and local income and property taxesii) Donations made to charitable organizations iii) Employee transference expensesiv) Medical expenses incurredv) Casualty lossesvi) Interest paid on mortgage

However, the individual can either avail standard deduction or itemized deduction.

the best alternative in understanding such a complex structure is to catch a person who knows the tax structure better and let him do all the work, but keep your eyes and ears open.

Article Source: www.ArticlesBase.com

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